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Brown tax envelope| AccountingWEB | HMRC targets unrepresented in basis period reform
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HMRC targets unrepresented in basis period reform

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HMRC is writing to unrepresented taxpayers who it believes might be affected by basis period reform. Emma Rawson explains more about these letters, and how they might land.

23rd Feb 2024
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Unrepresented sole traders and partnerships with a year-end other than 31 March or 5 April could have a surprise landing on their doormats in the next week or so. This will take the form of an HMRC letter saying they may be affected by changes to the basis period rules. 

Whilst the agent community has been aware of basis period reform for some time, for many unrepresented taxpayers this will be their first encounter with it. They may be shocked to learn that what appears at first to be a very technical change, could result in them needing to do extra work and receiving a higher tax bill.

What is basis period reform?

Before we get into the details of the letters HMRC are sending out, it’s helpful to have a quick reminder of what basis period reform will do and who will be affected.

Basis period reform represents a major change in how the trading profits of unincorporated businesses (such as sole traders and members of partnerships) are calculated for tax purposes.

From 6 April 2024, a new ‘tax year basis’ of assessment will apply to trading profits subject to income tax.  Under the tax year basis, businesses will be taxed on the profits arising in each tax year regardless of their accounting period end date.

Effectively, where a business has a year-end other than 31 March or 5 April (or a date in-between), they will need to apportion amounts from two sets of accounts to calculate their profits for every tax year from 2024/25 onwards.

If the second set of accounts isn’t ready in time to file their tax return, they may also need to file using provisional figures, and then amend their return once the final position is known.

The current tax year 2023/24 is a transitional year, in which we switch over from the current year basis of assessment to this new tax year basis. Specific rules apply in the transitional year, which may result in more than 12 months’ worth of profit being taxed. These can be partly alleviated by offsetting any overlap relief brought forward and spreading the remaining extra profits over up to five years.

More information on basis period reform can be found in the ATT’s dedicated FAQs page.

What do the letters say?

A copy of the letter HMRC is sending to unrepresented taxpayers can be found on the ATT website

It highlights that the recipient may be affected by basis period reform, and that this could change the way they complete their self-assessment returns, increase their admin burdens and potentially even lead to an increase in their tax bills. The taxpayer is then directed to several sources of further support, including YouTube videos and GOV.UK guidance.

The letter is very brief – only one page – but it is just the opening salvo in HMRC’s communications campaign, which will be ramped up as we move into the 2023/24 tax return preparation season.

How might they land?

Unrepresented taxpayers receiving these letters would be forgiven for being confused and concerned. The basis period reform rules and their various implications are not the easiest to explain and can often leave even tax professionals uncertain.

The letters may prompt taxpayers who have, to date, been going it alone to seek professional advice. Tax agents and accountants should make sure they are on top of the rules and fully equipped for the conversations that could follow.

The easiest fix for unrepresented taxpayers is likely to be to change their accounting date to 31 March or 5 April. The advantage of doing this in 2023-24 is that the usual HMRC restrictions (such as the 18-month limit on accounts) fall away and no longer apply. Taxpayers can also spread any excess profits which are brought into account due to changing account date in 2023-24 over up to five years.

However, not all affected taxpayers will be able to, or want to make such a change. Where that is the case, it will be important to be up front with any prospective new clients about what basis period reform might mean in terms of their admin burdens, and professional fees going forward.

HMRC will be in attendance on both days of the Festival of Accounting & Bookkeeping on 13 and 14 March, where they will be running sessions and manning a stand. Book your FREE ticket now. 

Replies (21)

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By Paul Crowley
23rd Feb 2024 14:35

Having now read the letter, it is not really much help unless the taxpayer has got his act together. Given that 3 million will be filing in January, I expect a few calls from the unrepresented that leave it a bit late.

Thanks (2)
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By Mitch
23rd Feb 2024 16:14

I wonder what taxpayer database HMRC are using when sending this letter.
My partner died in August and HMRC were notified by the Tell Us Once service. He had a tax agent (my company) prior to his death and a further 64-8 was submitted after his death. HMRC wrote to me as the personal representative in September advising that they wanted both a 2022/23 & Date of Death Tax Return. The 2022/23 Tax Return was submitted in January showing cessation of self employment on 30 November 2022 (A self-employment cessation form had previously been submitted also).

Given that my partner is dead, had a tax agent and ceased self employment in November 2022, why did I receive one of these letters, addressed to him, this week? Answers on a postcard!!!!

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By GHarr497688
23rd Feb 2024 18:53

I would think it might be helpful to say in the letter the reason why this change is being made and the fact that this relevant fact isn't mention. Could they add:

"The reason we are making this change is that we thought of a great idea back in 2015 which most participators are against however as HMRC know best we decided to plough ahead with the change and because we don't understand the taxpayer we have delayed around 10 times. Unfortunately to make this work and save face we have to force you to go to the time and trouble of making the change now. We only have two year to force this change which concerns us"

Thanks (3)
RLI
By lionofludesch
24th Feb 2024 15:25

Unrepresented, you say?

Well, that's the risk they take.

Thanks (2)
Replying to lionofludesch:
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By Rob Swan
25th Feb 2024 13:43

Fair enough, but....
I expect quite a lot of unrepresented self employed don't earn enough to (financially) justify the cost of a representative and. if forced (by circumstances) to engage such assistance, would simply consider self employment not worth it.
It'll be interesting to see how much (additional) chaos this adds to.... everyhing else...

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By Rob Swan
26th Feb 2024 08:47

Low hanging fruit, easy pickings.
HMRC have a 'Marketing' Dept. !!!! Yes!!! They do!!!! (Goodness knows why they need to 'Market' themselves, as if they have 'competition'!! Ffff.... Ffwaaahhh!) So why on earth don't they go out and 'market' a little help for those who might struggle with this, and make life easier for everyone, themselves included? Makes my fluids boil!!
Rant over. Back to work....

Thanks (1)
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By richards1
26th Feb 2024 09:44

Can someone explain why it would not be possible for a tax payer to change accounting date to make their life easier?

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Replying to richards1:
Emma Rawson
By Emma Rawson
26th Feb 2024 10:31

Taxpayers absolutely can (and arguably should) change their year-end. The downside is they won't escape the transitional rules in 2023-24 so could still have more tax to pay. It will however make their life much easier going forward.

If they change in 2023-24 they can access spreading and some of the normal rules (e.g. 18m limit on a set of accounts) fall away. However, understanding all that, and getting it right, may well be a challenge for unrepresented taxpayers. For some trades (e.g. farming) a 31 March / 5 April year-end is also a commercial no go.

We've been asking HMRC to promote the option of changing accounting date to unrepresented taxpayers in guidance and comms.

Thanks (1)
Replying to Emma Rawson:
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By David Heal
26th Feb 2024 11:39

As an unrepresented small farmer with low turnover, marginal profitability and a current year end of 31st May, this all sounds like a complete nightmare. In March and April lambs are being born, some dying at random times throughout the day and night, sheep have to be transferred from stock to the herd on first lambing. The chances of correctly assessing the position, stock levels and values at midnight on 5th April are somewhat slim. The world has finally gone mad.

Thanks (2)
Replying to Emma Rawson:
RLI
By lionofludesch
26th Feb 2024 11:42

Emma Rawson wrote:

Taxpayers absolutely can (and arguably should) change their year-end. The downside is they won't escape the transitional rules in 2023-24 so could still have more tax to pay. It will however make their life much easier going forward.

If they change in 2023-24 they can access spreading and some of the normal rules (e.g. 18m limit on a set of accounts) fall away. However, understanding all that, and getting it right, may well be a challenge for unrepresented taxpayers. For some trades (e.g. farming) a 31 March / 5 April year-end is also a commercial no go.

We've been asking HMRC to promote the option of changing accounting date to unrepresented taxpayers in guidance and comms.

Thanks (1)
Replying to lionofludesch:
RLI
By lionofludesch
26th Feb 2024 11:45

lionofludesch wrote:
For some trades (e.g. farming) a 31 March / 5 April year-end is also a commercial no go.

Interestingly, when I started in the profession, just about every farmer had a 5th April year end.

A legacy of the withdrawal of Schedule B in (I'm guessing now) 1949. Twenty five or thirty years on, nobody thought to change the year end.

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By agknight
26th Feb 2024 10:12

I'm vehmently against changing my 31st December year end clients just for the benefit of HMRC.

We are being run by administrators not entrepreneurs. It will be part of the economic death of this country.

My only outlet is to write that here!

Thanks (2)
Replying to agknight:
RLI
By lionofludesch
26th Feb 2024 11:33

agknight wrote:

I'm vehmently against changing my 31st December year end clients just for the benefit of HMRC.

We are being run by administrators not entrepreneurs. It will be part of the economic death of this country.

My only outlet is to write that here!

In these days of accounting software, it shouldn't be a huge task to prepare accounts to 31 March for HMRC and 31st December for your own management purposes.

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Morph
By kevinringer
26th Feb 2024 12:46

I still don't understand what loophole HMRC think they're closing because Basis Period Reform opens more. For example, of you have a non-31 March/5 April year end, you'll be able to accelerate a proportion of your capital allowances (and other expenditure) into the previous tax year. Did HMRC want to create this new loophole?

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Replying to kevinringer:
RLI
By lionofludesch
26th Feb 2024 12:52

kevinringer wrote:

I still don't understand what loophole HMRC think they're closing because Basis Period Reform opens more. For example, of you have a non-31 March/5 April year end, you'll be able to accelerate a proportion of your capital allowances (and other expenditure) into the previous tax year. Did HMRC want to create this new loophole?

They're not closing a loophole.

They're facilitating their MTD obsession.

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Replying to lionofludesch:
Morph
By kevinringer
26th Feb 2024 13:11

But how does Basis Period Reform facilitate MTD? I could understand it if the businesses was required to report actual profits to 31 March/5 April, but it isn't, it reports n/365ths of the following 12 months.

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Replying to kevinringer:
RLI
By lionofludesch
26th Feb 2024 13:27

kevinringer wrote:

But how does Basis Period Reform facilitate MTD? I could understand it if the businesses was required to report actual profits to 31 March/5 April, but it isn't, it reports n/365ths of the following 12 months.

Depends if your year end is 31 March/5 April. Surely that's the idea. No n/365 about it.

Personally, I believe you should be able to choose your own year end but, in fairness, a lot of other countries seem to cope with a fixed year end.

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Replying to kevinringer:
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By Rob Swan
26th Feb 2024 14:36

I'm guessing, but in an 'educated' way.....
Some poor, lowly, junior programmer, burrowing away in his cubicle at Fujits-it-up Corp. decided (read 'assumed'), while working on the MTD ITSA (codename "BagOfSpanners) project, that every SA taxpayer had a 31Mar/5Apr year end. This went unnoticed for some time until... It was wayyyy too late to change and..... here we are. That's my guess ;)

Thanks (1)
Replying to Rob Swan:
RLI
By lionofludesch
26th Feb 2024 14:45

Rob Swan wrote:

I'm guessing, but in an 'educated' way.....
Some poor, lowly, junior programmer, burrowing away in his cubicle at Fujits-it-up Corp. decided (read 'assumed'), while working on the MTD ITSA (codename "BagOfSpanners) project, that every SA taxpayer had a 31Mar/5Apr year end. This went unnoticed for some time until... It was wayyyy too late to change and..... here we are. That's my guess ;)

Not a bad shout.

Thanks (1)
Replying to Rob Swan:
Morph
By kevinringer
26th Feb 2024 16:24

That would make sense if the tax was based on actual 31Mar/5Apr income, but it isn't. For example, 2029-30, a business with 31Dec year reports its 01Jan2030-31Mar2030 profits through MTD ITSA, but the tax is based on 3/12th of 01Jan2030-31Dec2030 profits.

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Replying to kevinringer:
RLI
By lionofludesch
26th Feb 2024 16:32

kevinringer wrote:

That would make sense if the tax was based on actual 31Mar/5Apr income, but it isn't. For example, 2029-30, a business with 31Dec year reports its 01Jan2030-31Mar2030 profits through MTD ITSA, but the tax is based on 3/12th of 01Jan2030-31Dec2030 profits.

It would make even more sense if the programmer didn't know that there were any businesses with a December year end.

Which is the point being made.

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